Open Source Business Models

Bill Venners: In your book, Beyond Software
Architecture, you write, "As of the writing of this book, I
know of no provable long-term sustainable business models
for open source software."

Luke Hohmann: I think it's too early to see if a purely
service-oriented model based on open source is economically
stable. I think we have some evidence with companies like
SleepyCat software that some open source business models proving sustainable. I'm not
convinced that RedHat is sustainable. I hope that they are. It's
just that a pure service-model offering is a really tricky
business to get big and successful.

Bill Venners: Why?

Luke Hohmann: How many times have you had good
service lately in your life? It's hard to give good service.
Service models don't tend to scale very well, because they are
typically based on people. Maintaining consistency of the
delivery of the service via the people as you grow is very hard.
Some of the companies who are in the open-source services
business are not cash flow positive, and some of the
companies who are cash flow positive have not yet burned
through their accumulated debt. That's not to say I hope open
source models don't succeed. I hope they do. I think the open
source movement is great. It's offering choice and providing
competition.

Joel on Software has a wonderful piece on the macro and
microeconomics of open source. In a nutshell, if you've got
$1000 to spend on a computer, and the operating system
costs $200, you've got $800 to spend on the hardware. If the
cost of the operating system is zero, then the hardware
manufacturer can get $1000. So the goal of IBM pushing open
source software has nothing to do with IBM being altruistic. If
IBM drives the cost of the operating system to zero, they get
more money for the hardware.

I want to be clear that I'm neither for nor against open source software. My comments are strictly based on the business implications of open source. And I'm not alone.
Michael Cusumano, of MIT's Sloan School of Management, echoes my analysis in his new book The Business of Software. He writes: "Time will tell if for-profit software companies can make a business out of selling services and products that complement free software. So far, the results have not been promising". So, let's see how things turn out, and hope that open source continues to provide us with better software.